The Unwanted Effects of International Financial Reporting Standards (IFRS) Adoption on International Trade and Investments in Developing Countries

The year 2010 witnessed two major business phenomena in the world. First, an unprecedented degree of consensus among more than 120 countries to require or permit the use of International Financial Reporting Standards (IFRS) in their jurisdictions and; second, for the first time in history Foreign Direct Investment (FDI) in developing countries reached a half of global investment inflows that are expected to lift up to over $2 trillion in 2012. When the International Organization of Securities Exchange Commissions (IOSCO) ratified International Financial Reporting Standards (IFRS) in 2002, FDI inflows started to grow from $'36 trillion to $1 trillion in 2005. Furthermore, when the European Union (EU) required its member to use IFRS in 2005, FDI inflows has doubled and reached its peak in 2007 at more than $2 trillion. The global trade also experienced the same increasing trend. Assuming that adopting IFRS promotes higher comparability and transparency of accounting information, the bigger question is does adopting IFRS affect countries' FDI inflows and values of international trade?To answer this question, we examine the effects of IFRS adoption on international trade and FDI inflows in developing countries. After controlling for generally accepted determinants of FDI inflows and international trade, we find a contradictory fact that developing countries adopting IFRS are unlikely to experience higher FDI inflows and international trade